Dollar steady but set for weekly drop on fading rate hike bets

By Ankur Banerjee and Harry Robertson

SINGAPORE/LONDON, July 17 (Reuters) - The dollar held steady on Friday but was poised for a weekly decline as a tame U.S. inflation report this week led traders to cut bets on imminent rate hikes from the Federal Reserve, although escalating attacks in the Middle East soured sentiment.

Iran and the United States exchanged intensifying fire in a week-long escalation that has largely unravelled last month's truce, spurring safe haven bids for the dollar and leading oil prices near one-month highs. [O/R]

In currency markets, the euro was flat at $1.145, set for a 0.3% rise in the week.

Sterling fell slightly to $1.346, but was on course for a 0.5% weekly increase, its third straight week of gains on fading concerns over Britain's fiscal outlook.

The Japanese yen was slightly stronger and fetching 162.26 per U.S. dollar, but remained rooted near the 40-year low of 162.84 it touched at the start of the month.

Traders remained wary of official intervention from Tokyo after Japanese Finance Minister Satsuki Katayama reiterated the government's readiness to take decisive action.

The dollar index, which measures the U.S. currency against six other units, was little changed at 100.69, set for a weekly drop of 0.3%.

The index hit a one-month low earlier this week on easing chances of a near term rate hike but safe-haven flows have helped support the greenback.

"There has been no let-up in the escalation of the conflict in the Middle East which continues to curtail appetite to sell the dollar," said Derek Halpenny, a senior currency strategist at MUFG.

"U.S. data releases yesterday have also helped curtail dollar selling," he added.

Data on Thursday showed U.S. retail sales rose slightly in June as lower gasoline prices weighed on receipts at service stations, but online spending surged, prompting economists to upgrade their second-quarter growth estimates.

The economy's resilience was underscored by other data also showing labour market stability. Economists believe the Federal Reserve would keep interest rates unchanged later this month after data showed consumer price inflation had cooled in June.

Yet policymakers are also wary of banking too heavily on one month of improvement after months when inflation moved in the wrong direction.

Chances for a Fed hike in July stood at 11%, versus a 25% implied probability last week, according to the CME FedWatch tool. Traders are pricing in 26 basis points of hikes by December.

"I don’t think July is live for rate hikes," said Tani Fukui, senior director of global economic and market strategy for MetLife Investment Management. "We expect neither rate hikes nor cuts in 2026."

The Australian dollar was poised for a third straight week of gains, although it was 0.24% softer on the day at $0.6981 as risk-off sentiment prevailed, with global stocks falling sharply.

China's yuan weakened from a one-month high against the dollar, but remained on track for its third straight week of gains. [CNY/]

(Reporting by Ankur Banerjee in Singapore and Harry Robertson in LondonEditing by Shri Navaratnam and Sam Holmes)